Faculty of Business Studies Tutor Marked Assignment B301 A:

| October 22, 2018

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Faculty
of Business Studies
Tutor
Marked Assignment
B301 A:Making Sense of
Strategy I
First Semester 2013 – 2014

A Rolls-Royce case study
Introduction
No
business today operates in a complete vacuum unaffected by market forces. By
their very nature business activities are competitive. Within a dynamic,
rapidly changing business environment producers are constantly entering and
leaving the market. At the same time, changing customer preferences provide
signals for businesses to develop new strategies with different products and
services. Some businesses will succeed by responding to and meeting market
needs, while others may not perform quite so well.
Few markets
have changed in recent years as much as civil aerospace. Ten years ago 950
million people travelled by air; five years ago they numbered 1.1 billion and
the total is set to climb to 2.5 billion by 2009. The aviation industry
provides more than 24 million jobs worldwide, while its contribution to the
world economy is estimated to rise to $1,800 billion by 2009. Today, one-third
of the world’s manufactured exports are transported by air. Twenty years ago
the proportion was just one-tenth.
Growth
in civil aviation markets has stimulated the competition between the businesses
that operate in it such as the airlines. This has a knock-on effect on their
suppliers – the aeroplane manufacturers – and in turn on their suppliers – the
engine manufacturers.
Rolls-Royce
is one of only three engine manufacturers in the world that has a proven
capability to design, develop and produce large gas turbine aero-engines. In
recent years the company has faced many challenges that have affected its
position in the aero-engine industry.
By
providing an analysis of the competitive environment affecting Rolls-Royce,
this case study illustrates how such information is being used by the company
as it works towards its vision of becoming the world’s first choice for power
solutions for the new century.
The market
Rolls-Royce
has not made motor cars since 1971. Rolls-Royce and Bentley Motor Cars Limited
is owned by Volkswagen but exclusive rights to use the Rolls-Royce name for
motor vehicles will pass to BMW in 2003.
The
Rolls-Royce group is a global business with customers in 135 countries and
production facilities in 14 countries. It employs around 40,000 people focused
upon the present and future requirements of civil aerospace, defence, marine
and energy markets. It has 56,000 aero engines in service with 300 airlines,
2,400 corporate and utility operators and supplies more than 100 armed forces.
The
engines are used in all sizes of commercial aircraft from business jets to the
largest modern airlines made by the two main aeroplane manufacturers Airbus Industry
and Boeing. As one of the most powerful brands in the world, Rolls-Royce
symbolises a promise to deliver reliability, integrity and innovation to buyers
and users.
The changing external environment
The
commercial aero-engine business of Rolls-Royce operates within two distinct
market sectors. These are:
·
new engine
sales to the two manufacturers such as Airbus Industry and Boeing, as well as
airlines;
·
engine
parts sales to airlines that service and maintain aircraft.

Competitors in this secondary
market include specialist maintenance companies. The new engine market is the
primary market, which provides access to the secondary market for the sales of
engine parts.
During
the 1970s, Rolls-Royce controlled less than 10% of the civil aerospace market.
The sector was characterised by intense commercial and technical competition
from General Electric and Pratt & Whitney of the USA.
Market
share could only be increased by major investment in new engines, and
developing an improved range of services for customers. This required the
company to become focused on service rather than products with services such as
information management, inventory management and on- and off-wing maintenance.

Improving service
The
aero-engine market is vertical with a limited number of buyers. The customers
of Rolls-Royce need to satisfy both their future and present needs. In the
past, decisions about aero-engines were largely based upon cost and efficiency.
However,
in today’s more competitive environment, Rolls-Royce’s customers look for a
much more complete service. Buying an aero-engine is a long-term decision. In
this very competitive environment, a key element is relationship marketing. Through
this process, Rolls-Royce and its staff have learned to develop activities and
services that build good relationships with its customers.
Customers
are increasingly looking for a much more complete service. Although the product
will always be important, customers expect higher levels of service such as the
shipping of parts, after care service and total customer care. Where total
customer care is successfully provided alongside efficient products, occasional
customers become regular customers and then regular customers become advocates.
The
Rolls-Royce share of the competitive secondary engine parts market has been
growing. An emphasis upon total care is at the heart of the growth strategy.
Rolls-Royce provides parts and a service for its customers that extends through
the operational product life-cycle.
Porter’s Five Forces model
One
way in which staff within Rolls- Royce have focused their actions for
responding to the changing role of the business, has been to use Porter’s ‘Five
Forces’ model of industry competition. Five Forces analysis gives an improved
understanding of the degree of competition within the business environment. It
has helped them to develop a better understanding of the business environment
so that business opportunities could be analysed. The model identifies one
force within the industry – competitive rivalry – as well as four forces
outside the industry:
·
potential entrants and the threat
of entrants
·
power of buyers
·
power of suppliers
·
threat of substitutes
Competitive rivalry
As described
above three dominant players operate in this oligopolistic globalindustry. The
industry is capital intensive and there is a requirement for high investment in
advanced technology and research and development. No single manufacturer
dominates the industry, so balance fuels the rivalry.
Competition
in the primary market for aero-engines is intensified by the link to the
secondary market for engine part sales and services. Access to the secondary
market is dependent on achieving the original sale of new engines. In recent
years the intensity of competition has increased as each manufacturer has tried
to improve its volumes and market share. Rivalry has also intensified because
gas turbine engines are now essentially a mature product and the potential for
technological differential advantage has been reduced.
Power of buyers
The
numbers of potential buyers of new aircraft are low. Buyers of aircraft engines
are therefore essentially price makers, with the market price for new engines
being largely set by the buyer. The power of buyers has further increased in
recent years as many airlines have become ‘global carriers’.
The
decision to purchase a particular aircraft or engine combination is a long-term
one. This means that failure to secure an order may prevent an engine
manufacturer trading with a particular airline for more than a decade. The
selection of one engine type can lead to a domino effect, with other competing
buyers following the same selection. Airlines are increasingly seeking lifetime
cost of ownership guarantees, and reduced repair costs.
Power of suppliers
The
suppliers to the aero-engine manufacturer have limited power. There are many
hundreds of different suppliers to the aero-engine industry. They supply all
nature of components, from nuts and bolts to state-of-the-art electronic
control systems costing hundreds of thousands of pounds. The power of many of
the smaller companies, which represent most of the supplier base, has been
reduced. This is due to engine manufacturers adopting dual sourcing strategies,
using a range of alternative sources of supply. The most powerful suppliers are
those involved in the supply of high specification electronic control
equipment.
Threat of entry
Although
not unknown, entry to the aero-engine industry is extremely difficult. The
highly specialised advanced nature of aero-engine design combined with the
costs of research and development as well as the confidence of customers
represent significant barriers to entry. New engines also need extensive testing
before gaining airworthiness approval from the authorities. The market is also
sensitive to the reputation of the engine manufacturer, where names such as
Rolls-Royce represent a range of proven high-technology products.
Threat of substitutes
There
is no substitute for an aero engine and the threat of substitutes for air
transport itself is minor. However, it is thought that the development of video
conferencing capability will reduce some business travel and the growth of high
speed train travel (e.g. Eurostar) will affect some travel decisions. However,
both of these developments are taking place at a time when the demand for air
travel is increasing.
This
analysis shows that the commercial aero-engine business is highly competitive,
with the buyer possessing and exerting a very powerful influence upon
organisations. The high barriers to entry and the low threat of substitutes
indicate that existing competitors will continue to share the business between
them. However, a slowdown in industry growth and the increasing maturity of
products will intensify the degree of rivalry between the engine manufacturers.
Conclusion
In
response to changes within its business environment, Rolls-Royce has developed
its orientation from that of engineering to become more business- and
service-focused. The organisation has had to become much more proactive,
dealing with new ideas to create more services and customer focus. In the past,
change was rare and slow, the company tended to follow the market trend. The
structure of the organisation has been realigned to meet the needs of the new
way of operating.
Organisational
structures define important relationships within the business and create a
mechanism for meeting business objectives. At the same time, it has been
important to create a new business culture within Rolls-Royce. A culture exists
within the minds and hearts of the people of an organisation and contributes to
the way they make decisions and develop business strategies. As an organisation
changes from a product-focused organisation towards becoming a
service-orientated culture, this requires more involvement of its people, with
greater empowerment and rapid decision-taking.
The corporate identity is the sum of the culture and its
expression in behaviour and physical terms. Rolls-Royce has defined the
identity that it needs to encourage, building on its past reputation and
achievements for continuing success. As these changes take place, the
organisation is also realigning its financial reporting framework and corporate
governance. This will change how the whole business shapes its purposes and
priorities.

Source: www.businesscasestudies.co.uk

Question(2,000 words, 80 marks)
Using the case study,
relevant B301A course materials, and E-library sources, discuss the importance
of Porter’s five forces framework for Rolls-Royce in
analyzing its industry competition. In your essay, make sure to discuss the
following:

1) To what extent
can Rolls-Royce’s strategic approach can be best categorized as
“Deliberate” or as “Emergent”? Explain your
answer. (The total mark for this part is 10 marks),
2) Explain Porter’s
five forces framework and suggest to what extent it has helped Rolls-Royce
to better analyze its industry (The total mark for this part is 20 marks),
3)
The industry structure (The total marks for this part is 10 marks),
4) How game theory can
improve companies’ strategy (The total mark for this part is 20 marks) and
5) The concept of
competitive advantage. Support your answers with examples (The total mark
for this part is 20 marks).

General instructions for
students:
Cut-off date: 30 November 2013
TMA weight: 20% of total course grade.
Course material:
·
Block
1 (Unit 1)
·
Readings
for Block 1&2 (Reading 4).
·
Readings
for Block 1&2 (Reading 5).

Marks distribution: This assignment will be graded out of 100 marks, of
which 80% of these marks will be allocated to your answer for the different
questions. The remaining 20% will be distributed among the following criteria:

10% for
proper referencing (5% in text referencing and 5% references)
5% for adherence to specified word count
5% for the use of the E-library/External resources.

Plagiarism:It’s imperative that you write your answers using your
own words. Plagiarism will be penalized depending on its severity and according
to AOU plagiarism policy.
Format: you are expected to write your
answers in an essay format: introduction, body paragraph(s) and a conclusion.
Word count: your answers are expected to be within the specified
word count (±10% will be accepted).
Referencing: You are
expected to use the Harvard referencing style for in-text referencing and list
of reference at the end.
E-library: You are expected to use E-library sources to support
your answers. A minimum of 3 sources is required.

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